Monday 28 May 2012 16.20 EDT
First published on Monday 28 May 2012 16.20 EDT

The government's reputation has suffered a series of fresh blows as the chancellor, George Osborne, was forced to make two climbdowns over his budget, including scrapping the "pasty tax", and ministers prepared to make a series of new concessions over secrecy.

Osborne is to reverse plans to charge VAT on food that is designed to cool down, such as sausage rolls and pasties, and will also reduce the new VAT charge on static caravans from the standard 20% rate to 5%. The climbdowns follow weeks of protest, including by Tory MPs, and will together cost the cash-strapped Treasury as much as £70m annually.

The budget concessions, announced by the chancellor in a letter to the Treasury select committee, were deferred until the Commons was no longer sitting.

Following intense lobbying by the deputy prime minister, Nick Clegg, the justice secretary, Kenneth Clarke, is to drop plans to include closed inquests with evidence heard in private in his secret courts bill due to be published on Tuesday.

Clarke admitted he was making "substantial changes" to his original green paper, while senior Liberal Democrats claimed the balance between liberty and security had been transformed.

Ministers will doubtless claim the latest rash of U-turns are an occupational hazard of coalition government, or the sign of a government willing to listen, but they will add to the sense of incompetence that appears to have gripped the government ever since the ill-starred budget, an event that has led to a precipitous decline in David Cameron's personal poll ratings.

The two taxes were also seen as symptomatic of a government out of touch with ordinary working people. Cameron had defended the move, designed to put 20% VAT on all food sold "above ambient temperature", insisting he loved a pasty.

George Eustice, a Tory MP from Cornwall who campaigned against the tax, said: "This welcome announcement means all pasties will be exempt from VAT, and shows this has been a genuine consultation."

Under the changes, the government will charge VAT on food designed to be eaten warm, for example on rotisserie chickens sold hot by supermarkets.

The VAT, due to be enforced from October, would have added 50p to a £2.50 savoury food item. The Treasury had been planning to raise £110m from the measure, but will now only raise £70m.

Critics said the proposals were incredibly complex since it would be hard to define ambient temperature.

In the other change, VAT will be set at 5% for static caravans used for holiday purposes. That means an expected income of £40m falls to £10m-15m.

Labour said it showed the government was a shambles. The shadow Treasury minister, Chris Leslie, said: "I think they were forced to listen to the total bewilderment of the public who were completely astonished at these rather odd decisions. The other reason they have made this decision is the Commons is in recess, so there is no ability to challenge them in parliament.

"On the Wednesday when the Commons returns, there is scheduled to be a vote that we have put down on the caravan tax - it was a narrow majority of only 25 last time, so they were facing defeat.

"They are not U-turning out of the kindness of their hearts; it is because they are being forced to do so.

"What a chaotic way to run a country. How on earth can you have a budget process that unravels in a day when you've got this kind of shambolic business?"

A Treasury spokesman said: "At the budget, we announced proposals to address anomalies that have built up in the VAT system and have led to similar products being taxed differently.

"We have now finished the consultation on these proposals and are taking on board the points made, while still making sure we meet the objective of a clearer and more consistent system that we set out at the time."

In arguably a deeper philosophical U-turn, Liberal Democrats are claiming credit for ensuring inquests will not be subjected to so-called "closed material procedures" meaning information held by the security and intelligence agencies could be heard only in secret.

A senior Lib Dem official pointed out that Clegg, in a letter to the national security council last month, had said he was unhappy with the wide scope of the green paper.

The source claimed: "As a result of the deputy prime minister's intervention, these proceedings are restricted to exceptional cases of national security; a judge, not ministers, decides; and, crucially, these measures will never apply to inquests. Clegg made clear that he would not let security concerns erode the principle of open justice."

But the main purpose of the bill will remain: evidence and claims made by MI5, MI6 and GCHQ would be presented to the court, but would not be disclosed to individuals seeking damages or making complaints. As a result, they would not be able directly to challenge the agencies. Instead, their interests will be presented by vetted "special advocates".

Judges will decide whether to agree to a minister's request that evidence should be heard only in secret on grounds of national security.

The model for extending secret hearings into the civil courts will be based on the process already in use in the special immigration appeals commission, the body which has been hearing Abu Qatada's bail application this week.

Opponents of closed material procedures say that evidence that cannot be tested properly in court – if the claimant cannot hear accusations being made – is not reliable. Many of the special advocates themselves objected to the draft legislation. The bill will also allow ministers to claim secrecy is needed on national security grounds for swathes of information, not only material in the hands of the security and intelligence agencies.

The bill will forbid evidence being heard from witnesses, for example, from a foreign intelligence agency with relevant knowledge of the case but who are not parties to it. Whitehall officials said the phrase "public interest" used in the green paper has been removed and replaced in the bill by "national security". Officials say this is a much narrower test.

Dominic Grieve, the attorney general, told Liberty's annual general meeting on Saturday that the bill filled him with a "considerable amount of distaste" but that it would apply only to a "very small number of cases".Clarke has said the powers are needed to reassure other countries, particularly the US, that they can continue to share intelligence without fear of it being exposed in British courts. Evidence of MI5 and MI6 knowledge of CIA abuse of detainees emerged during a high-court hearing brought by lawyers for Binyam Mohamed, the UK resident held in Guantánamo Bay for more than four years.